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Unit 3:

Strategy Formulation
What Is Strategy?
The term strategy is derived from a Greek word
‘Strategos’ which means general ship – the actual
direction of military force, as distinct from the policy
governing its deployment. Strategy is a broad game
plant to achieve objectives. It provides direction and scope
to the organization over the long term. Literally the
word strategy means the art of the general.
Strategy::
Strategy
Strategy can be defined as the management action
plan for achieving the chosen objectives. It commits
the organization to specific products, market,
resources and technology. It specifies how the
organization will be operated, run & what
entrepreneur, competitive & functional area approach
& action will be taken to put the organization into
the desired position.
Strategy considers both means & ends. The goals &
decisions making up an organization's strategy may be
planned ahead of time or may just evolve as a pattern
in the stream of significant decisions.
Strategy::
Strategy
It determines the basic long-term goals & objectives
of an enterprise and the adoption of courses of
action and the allocation of resources necessary for
carrying out these goals.
Strategic Management:
Management:
Strategic management is the art and science of
formulating, implementing and evaluating cross-
functional decisions that will enable an organization
to achieve its objectives. It is the process of specifying
the organization's objectives, developing policies and
plans to achieve these objectives, and allocating
resources to implement the policies and plans to
achieve the organization's objectives.
Strategic management, therefore, combines the
activities of the various functional areas of a business
to achieve organizational objectives.
Strategic Management:
Management:
Strategic management is a set of decisions & actions
that result in formulating & implementation of plans
designed to achieve a company’s objectives.
Because it involves long term, future oriented,
complex decision making & requires considerable
resources, top management participation is essential.
Strategic management is a three-tier process
involving corporate, business & functional level
planners, & more specific, narrow, short-term, &
actions oriented, with lower risks but fewer
opportunities for dynamic impact.
Strategic Management:
Management:
The purpose of strategic management is to exploit
and create new and different opportunities for
tomorrow, long range planning, in contrast, tries to
optimize for tomorrow the trends of today.
Strategic management provides overall direction to
the enterprise and is closely related to the field of
Organization Studies. In the field of business
administration it is possible mention to the "strategic
consistency.
.
Strategic Management:
Management:
Strategic Management is simply the art of turning
strategies into action.
Strategy management exploits new opportunities for
tomorrow.
Well implementation of corporate to achieve &
maintain competitive advantage
Strategy management refers to strategic decisions &
actions of the top management.
Strategy management is known as a process of
strategy formulation, implementation, &evaluation &
control.
DIFFERENT LEVELS OF
STRATEGY

Corporate

Operational Business

Functional
DIFFERENT LEVELS OF
STRATEGY:
Corporate
level
Business
level
Operational or
functional level
CORPORATE LEVEL:
 CORPORATE STRATEGY
 Corporate strategy tells us primarily about
the choice of direction for the firm as a
whole. In a large multi business company,
however, corporate strategy is also about
managing various product lines and business
units for maximum value. Even though each
product line or business unit has its own
competitive or cooperative strategy that it
uses to obtain its own competitive advantage
in the market place, the corporation must
coordinate these difference business
strategies so that the corporation as a whole
succeeds.
 Corporate strategy includes decision
regarding the flow of financial and other
resources to and from a company’s product
line and business units. Through a series of
coordinating devices, a company transfers
skills and capabilities developed in one unit to
other units that need such resources
Types of Corporate Strategies:

 A) Growth strategies expand the


company’s activities.
 B) Stability strategies make no change
to the company’s current activities.
 C) Retrenchment strategies reduce
the company’s level of activities.
 D) Combination strategies is the
combination of the above three strategies
CORPORATE LEVEL STRATERGY
 Growth Strategy
◦ Seeking to increase the organization’s business by
expansion into new products and markets.

 Types of Growth Strategies


◦ Concentration
◦ Vertical integration
◦ Horizontal integration
◦ Diversification
GROWTH STRATERGIES:
 Concentration: Focusing on a primary line of
business and increasing the number of products
offered or markets served.
 Vertical Integration: 1). Backward vertical
integration.
2). Forward vertical
integration.
 Horizontal Integration: Combining operations
with another competitor in the same industry to
increase competitive strengths.
DIVERSIFCATION STRATEGY:
 When an industry consolidates and
becomes mature, most of the surviving firms
have reached the limits of growth using
vertical and horizontal growth strategies.
Unless the competitors are able to expand
internationally into less mature markets,
they may have no choice but to diversify
into different industries if they want to
continue growing. The two basic
diversification strategies are
 Concentric
 Conglomerate
DIVERSIFCATION STRATEGY:
 Concentric Diversification (Related) into a
related industry may be a very appropriate
corporate strategy when a firm has a strong
competitive position but industry
attractiveness is low. By focusing on the
characteristics that have given the company its
distinctive competence, the company uses
those very strengths as its means of
diversification. The firm attempts to secure
strategic fit in a new industry where the firm’s
product knowledge, its manufacturing
capabilities, and the marketing skills it used so
effectively in the original industry can be put
to good use.
DIVERSIFCATION STRATEGY:

 Conglomerate Diversification (Unrelated) takes


place when management realizes that the current
industry is unattractive and that the firms lacks
outstanding abilities or skills that it could easily
transfer to related products, or services in other
industries, the most likely strategy is conglomerate
diversification – diversifying into an industry
unrelated to its current one. Rather than
maintaining a common threat throughout their
organization, strategic managers who adopt this
strategy are primarily concerned with financials
considerations of cash flow or risk reductions.
Mergers, acquisitions and joint
ventures
MEANING
Merger
•A transaction where two firms agree to integrate
their operations on a relatively co-equal basis
because they have resources and capabilities that
together may create a stronger competitive
advantage.
•The combining of two or more companies,
generally by offering the stockholders of one
company securities in the acquiring company in
exchange for the surrender of their stock
•Example: Company A+ Company B= Company C.
ACQUISITION
 A transaction where one firms buys another
firm with the intent of more effectively using
a core competence by making the acquired
firm a subsidiary within its portfolio of
business
 It also known as a takeover or a buyout
 It is the buying of one company by another.
 In acquisition two companies are combine
together to form a new company altogether.
 Example: Company A+ Company B=
Company A.
MERGER ACQUISITION

COMPANY COMPANY COMPANY COMPANY


A B A B

Company A and Company


B together form the new Company A buys
Company C Company B Company A
DIFFERENCE BETWEEN MERGER AND ACQUISITION
ACQUISITION::

MERGER ACQUISITION

i. Merging of two i. Buying one organization


organization in to one. by another.
ii. It is the mutual decision. ii. It can be friendly
iii. Merger is expensive than takeover or hostile
acquisition(higher legal takeover.
cost). iii. Acquisition is less
iv. Through merger expensive than merger.
shareholders can increase iv. Buyers cannot raise
their net worth. their enough capital.
v. It is time consuming and v. It is faster and easier
the company has to transaction.
maintain so much legal vi. The acquirer does not
issues. experience the dilution
vi. Dilution of ownership of ownership.
occurs in merger.
MERGER:WHY & WHY NOT
WHY IS IMPORTANT PROBLEM WITH MERGER

i. Increase Market
Share.
i. Clash of
ii. Economies of scale
iii. Profit for Research
corporate
and development. cultures
iv. Benefits on account ii. Increased
of tax shields like business
carried forward
losses or unclaimed complexity
depreciation. iii. Employees may
v. Reduction of be resistant to
competition.
change
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ACQUISITION:WHY & WHY
NOT
PROBLEM WITH
WHY IS IMPORTANT ACUIQISITION

i. Increased market
share.
i. Inadequate
ii. Increased speed valuation of
to market target.
iii. Lower risk ii. Inability to
comparing to achieve
develop new
products. synergy.
iv. Increased iii. Finance by
diversification taking huge
v. Avoid excessive debt.
competition

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MEANING OF JOINT VENTURE

Joint venture is the co operation of


two or more individuals or business
in which each agrees to share profit,
loss and control in a specific
enterprise.
FEATURES OF JOINT VENTURE
 Joint venture is a short duration special purpose
partnership.
 Joint venture does not follow the accounting concept
'going concern'.
 The members of joint venture are known as co-
ventures.
 Joint venture is a temporary business activity.
 In joint venture, profits and losses are shared in
agreed proportion. If there is no agreement regarding
the distribution of profit, they will share profit equally.
 Joint venture is an agreement for polling of capital and
business abilities to be employed in some profitable
venture.
ADVANTAGES
 Accessing additional financial resources:
 Sharing the economic risk with co-
venturer
 Widening economic scope fast
 Tapping newer methods, technology, and
approach you do not have
 Building relationship with vital contacts
DISADVANTAGES
 Shared profit – Since you share assets,
you also share the profit.
 Diminished control over some important
matters - Operational control and
decision making are sometimes
compromised in joint ventures.
 Undesired outcome of the quality of the
product or project.
 Uncontrolled or unmonitored increase in
the operating cost
Difference between Merger, Acquisition &
Joint Venture
 Merger = two companies come together "permanently"
for mutual gains or to reduce competition

 Acquisition = one company buys another company


which may or may not be doing well

 Takeover = same like "acquisition", but generally a


company buys another company which is not doing well
or has gone bankrupt.

 Joint Venture = two companies come together


"temporarily" for mutual gains for a particular
project/job. after the project/job is completed the joint
venture is dissolved.
Retrenchment Strategies
Corporate Level Strategies
Retrenchment Strategies
Retrenchment strategy
 A retrenchment grand strategy is
followed when an organization
aims at a contraction of its
activities through substantial
reduction or the elimination of
the scope of one or more of its
businesses in terms of their
respective customer groups,
customer functions, or alternative
technologies either singly or
jointly in order to improve its
overall performance.
Examples of Retrenchment strategy
 General Motors of the United
States stopped producing a
number of "makes" of
automobile. GM decided that
it needed to retrench by
concentrating on just a few
"makes." It hoped this would
help it return to profitability.
Turnaround strategies
 Turn around strategies derives
their name from the action
involved that is reversing a
negative trend. There are
certain conditions or indicators
which point out that a
turnaround is needed for an
organization to survive. An
organization which faces one
or more of these issues is
referred to as a ‘sick’ company.
Turnaround strategies
 There are three ways in which
turnarounds can be managed
◦ The existing chief executive and
management team handles the
entire turnaround strategy with
the advisory support of a
external consultant.
◦ In another case the existing team
withdraws temporarily and an
executive consultant or
turnaround specialist is employed
to do the job.
◦ The last method involves the
replacement of the existing team
specially the chief executive, or
merging the sick organization
with a healthy one.
Examples of Turnaround strategies
 Xerox revealed a
Turnaround Programme in
December 2000, which
included cutting $1 billion in
costs, and raising up to $4
billion through the sale of
assets, exiting non-core
businesses and lay-offs.
Subsequently, in August
2001, Mulcahy was made
CEO. Xerox continued to
report losses in 2001, but it
returned to profit in 2002
and continued to report
profits in 2003.
Divestment strategy
 A divestment strategy

involves the sale or

liquidation of a portion of

business, or a major

division.
Divestment strategy
 TATA group is a highly diversified

entity with a range of businesses

under its fold. They identified their non

– core businesses for divestment.

TOMCO was divested and sold to

Hindustan Levers as soaps and a

detergent was not considered a core

business for the Tatas.


Liquidation Strategy
 A retrenchment strategy
which is considered the most
extreme and unattractive is
the liquidation strategy,
which involves closing down
a firm and selling its assets. It
is considered as the last
resort because it leads to
serious consequences such
as loss of employment for
workers and other
employees, termination of
opportunities where a firm
could pursue any future
activities and the stigma of
failure.
Examples of Liquidation Strategy

 JC Penney recently sold its


Eckerd chain of drugstores to
focus on the corporation’s core
business of department stores
and Internet and catalog sales.
Studies show that between 33
per cent and 50 per cent of all
acquisitions are later divested.
Business--Level Strategies:
Business
 A strategy that seeks to determine
how an organization should
compete in each of its SBUs
(strategic business units).

 At Business-level ALLOCATION
of re-sources among Functional-
level an COORDINATE with the
Corporate level to the
ACHIEVEMENT of the Corporate
level OBJECTIVES.
Business--Level Strategies(cont’d)
Business Strategies(cont’d)
 Cost leadership: Attaining, then using the
lowest total cost basis as a competitive
advantage.

 Differentiation: Using product features or


services to distinguish the firm’s offerings from
its competitors.

 Market focus: Concentrating competitively on


a specific market segment.
Business--Level Strategy
Business
Business-level strategy: an integrated and
coordinated set of commitments and actions the
firm uses to gain a competitive advantage by
exploiting core competencies in specific product
markets
The Central Role of Customers

In selecting a business-level strategy, the


firm determines
1. who it will serve
2. what needs those target customers have
that it will satisfy
3. how those needs will be satisfied
Managing Relationships With
Customers

 Customer relationships are strengthened by


offering them superior value
◦ help customers to develop a new competitive advantage
◦ enhance the value of existing competitive advantages
Five Generic Strategies
Competitive Advantage
Cost Uniqueness
Cost Differentiation
Competitive Scope Leadership

target
Broad
Integrated Cost
Leadership/
Differentiation
Narrow
target

Focused Cost Focused


Leadership Differentiation
Cost Leadership Strategy
An integrated set of actions designed to produce or
deliver goods or services at the lowest cost, relative
to competitors with features that are acceptable to
customers
◦ relatively standardized products
◦ features acceptable to many customers
◦ lowest competitive price
Cost Leadership Strategy
Cost saving actions required by this strategy:
◦ building efficient scale facilities
◦ tightly controlling production costs and
overhead
◦ minimizing costs of sales, R&D and service
◦ building efficient manufacturing facilities
◦ monitoring costs of activities provided by
outsiders
◦ simplifying production processes
Differentiation Strategy
An integrated set of actions designed by a firm to
produce or deliver goods or services (at an
acceptable cost) that customers perceive as
being different in ways that are important to
them
◦ price for product can exceed what the firm’s target
customers are willing to pay
◦ nonstandardized products
◦ customers value differentiated features more than
they value low cost
Differentiation Strategy
 Value provided by unique features and value
characteristics
 Command premium price
 High customer service
 Superior quality
 Prestige or exclusivity
 Rapid innovation
Differentiation Strategy
Differentiation actions required by this strategy:
◦ developing new systems and processes
◦ shaping perceptions through advertising
◦ quality focus
◦ capability in R&D
◦ maximize human resource contributions
through low turnover and high motivation
Focused Business-
Business-Level
Strategies
A focus strategy must exploit a narrow target’s
differences from the balance of the industry by:
◦ isolating a particular buyer group
◦ isolating a unique segment of a product line
◦ concentrating on a particular geographic market
◦ finding their “niche”
Portfolio Analysis (PA)

 PA is a technique used to analyse


organisations in relation to their environments
 Portfolio (set, collection, assortment, range,
group)
 A biz portfolio may be any collection of
brands / products, markets, branches /
divisions, income generating assets, e.t.c
 PA is usually applied to firms with multiple
SBUs (more than one product/services,
customer categories, markets , divisions)
PA Introduction–
Introduction– Cont.
 Helps managers in taking decisions regarding
which SBUs to allocate more or less resources
to at a given strategic point in time
 After portfolio analysis firm makes an informed
strategic choice e.g.
◦ To have a balanced portfolio (minimize risk
and maximize return) of all portfolios
◦ To actively deploy a retrenchment strategy
Portfolio Analysis Models:
 Have been developed by large firms in developed
world, mostly named against their inventors
 Are applicable even to smaller firms with multiple
SBUs.
Examples are shown below:
 The B.C.G model (Growth/Share matrix)
 The G.E Multi-directional model (competitive
strengths/Attractiveness matrix)
 Contribution Margin Analysis (how much profit
margin does that biz portfolio contribute?)
Boston Consulting Group (BCG) Model
 This is the most popular business portfolio
matrix
 It analyses the business portfolio in relation
to market share and market / industry
growth
 The above 2 variables (share & growth)
range from low to high
 A SBU is positioned in the model and the
firms strategy is guided by the SBU’s
positioning.
The BCG(Boston Consulting Group) model

Stars Question
High
marks
Industry/
market
growth rate Cash cows Dogs
Low
High Low
Relative market share
BCG Sections
Stars
 Business with a high market share and
high growth rate
 Generate huge sums of money
 Require huge sums of money to cope
with growth
Cash Cows
 Businesses with low growth but high
market share
 Generate huge sums of money at low
cost
 Are used to develop and promote new
businesses (they are “milked”)
BCG Sections – Cont.
Dogs
 Have low market share in an aged industry
 The strategy is, normally to sell them off.
Question marks (Fledglings)
 Sometimes called problem children (they
need to be grown).
 They generate low cash but need a lot to
tap the high growth rate.
 They can be grown into stars, resources
allowing.
 Too much commitment to question marks
can lead lead to liquidity problems.
The General Electrics (GE) Model
 This analyses
◦ Long term industry attractiveness and
◦ Business competitive strength
 These factors are assigned weights / ratings
based on their perceived importance
 The business is rated on each of the factors
 A combined rating is determined (factor
importance rating combined with the
business rating on the factor)
 Each business result is plotted on a 2-
dimensional matrix
Industry attractiveness Determinants

 Market growth and size


 Industry profitability
 Seasonality
 Porter's five forces
 Technology & Capital requirements
 Economies of scale
 Emerging opportunities and weakness
 etc
Competitive Strengths Determinants

 Relative market share


 Production capacity
 Company Image
 Profit margins
 Technological capabilities
 R & D strengths
 Market and customer knowledge
 Employee commitment
 Etc.
GE Nine Cell Matrix
GE Nine Cell Matrix
The GE/McKinsey Matrix is a nine-cell (3 by 3) matrix
used to perform business portfolio analysis as a step in
the strategic planning process.

The GE/McKinsey Matrix identifies the optimum


business portfolio as one that fits perfectly to the
company's strengths and helps to explore the most
attractive industry sectors or markets.

The objective of the analysis is to position each SBU


on the chart depending on the SBU's Strength and the
Attractiveness of the Industry Sector or Market on which
it is focused. Each axis is divided into Low, Medium and
High, giving the nine-cell matrix as depicted below.
GE Nine Cell Matrix
 Different factors can be used to define Industry Attractiveness.
Like:-
Market Size, Market Growth Rate, Demand variability, Industry
Profitability, Competitive Rivalry, Global Opportunities, Entry and
exit barriers, Capital requirement, Macro environmental Factors
(PEST)

 Different factors can also be used to define SBU Strength. Like:-


Market Share, Distribution Channel Access, Financial Resources,
R&D Capability, Brand equity, Production Capacity, Knowledge of
customer and market, Caliber of management. Relative cost
position

 The factors and their relative weightings are selected. The rating
values for each factor are entered for each SBU and Industry.
GE Nine Cell Matrix
Industry Business Unit Strength
Attractiveness

Strong Average Weak

High Grow Grow Hold

Medium Grow Hold Harvest

Low Hold Harvest Harvest


GE Nine Cell Matrix
 Grow – Business units that fall under grow attract high
investment. Firms may go for product differentiation or Cost
leadership. Huge cash is generated in this phase. Market
leaders exist in this phase.

 Hold – Business units that fall under hold phase attract


moderate investment. Market segmentation, Market
penetration, imitation strategies are adopted in this phase.
Followers exist in this phase.

 Harvest - Business units that fall under this phase are


unattractive. Low priority is given in these business units.
Strategies like divestment, Diversification, mergers are
adopted in this phase.
Market Attractiveness

 Annual market growth rate


 Overall market size
 Historical profit margin
 Current size of market
 Market structure
 Market rivalry
 Demand variability
 Global opportunities
Business Strength

 Current market share


 Brand image
 Production capacity
 Corporate image
 Profit margins relative
to competitors
 R & D performance
 Promotional
effectiveness
GE Nine Cell Matrix
Strength
a) It allows
intermediate ratings between high and low and
between strong and week.

b) It helps in channeling the corporate resources to business


and achieving competitive advantage and superior
performance.

c) It helps in better strategic decision making and better


understanding of business scope.

Weakness
a)It tends to obscure business that are become to winners
because their industries are entering at exit stage.

b)Assessment of business in terms of two factors is not fair.


EXAMPLE OF GE NINE CELL MATRIX
About Maruti Udyog
 Founded in 1981
 Products are Maruti 800, Omni, Alto,SX4,Swift
Desire,Swift,A-star, Gypsy,Wagon R,Ritz,others.
 Vision – “The Leader in the Indian Automobile
Industry, Creating Customer Delight and
Shareholder’s Wealth;a Pride of India”
 Core Values : Our Core Values drive us in every
endeavour-
 Customer Obession,
 fast, Flexible & first mover,
 Innovation & creativity
 Networking & Partnership
 Openess & Learning
THANK
THANK
YOU
 GE matrix is divided in 9 cells. Successful SBUs in GE matrix require high
market attractiveness and strong competitive positions. The matrix further
can be divided into 3 zones.
◦ Cell 1, 2, 4 (Invest/Grow): Strategic business units in these cells are
successful.They should be given priority in portfolio (i.e. invest and grow).
More investment should be allocated for growth.
◦ Cell 3, 5,7 (Grow/Let go): SBUs in these cells have medium success and
attractiveness.They should be included on selective basis for investment. It
means the company should pursue selectivity and manage for earnings.
◦ Cell 6, 8,9 (Harvest/Divest): These cells have low success and
attractiveness.They should be divested or closed down. It means company
should give serious thought to harvesting/producing or divesting these
business units.
 GE model helps managers to select strategies. The positioning
of SBUs in the cells is judgmental. Moreover unattractive SBUs are not
necessarily to be unprofitable. GE model provides broad strategy guidelines
only.